Bayerische Motoren Werke AG (OTCPK:BAMXF) Q4 2013 Earnings Call March 20, 2014 5:00 AM ET
Maximilian Schoeberl – Senior Vice President-Corporate Affairs
Norbert Reithofer – Chairman and Chief Executive Officer
Friedrich Eichiner – Chief Financial Officer
Kristina Church – Barclays Capital
Frank Biller – Landesbank Baden-Württemberg
Horst Schneider – HSBC
Arndt Ellinghorst – ISI Group
Michael Rabb – Kepler Cheuvreux
Christian Breitsprecher – Macquarie
Laura Lembke – Morgan Stanley
Jochen Gehrke – Deutsche Bank
Philippe Barrier – Societe Generale
Stefan Burgstaller – Goldman Sachs
Jose Asumendi – JPMorgan
So ladies and gentlemen, welcome. We are on time. Welcome to our Analyst and Investor Conference today at the BMW AG. I hope you all had a pleasant evening last night.
As usual, we will start with a statement from Dr. Norbert Reithofer, Chairman of the Board of Management of BMW AG. This will be followed by a statement from Dr. Friedrich Eichiner, Board Member for Finance who will discuss our financial performance in 2013. Afterwards you all are invited to join us for lunch. But now, the podium is yours Dr. Reithofer, please.
Good morning, Ladies and Gentlemen. The core task of a company is to safeguard its future. This means. We must ensure that our products and services are always inspiring our customers. We need to think ahead and continually to the next level.
We also have to remain profitable so we can invest and bring new ideas to life. Our ambition of the BMW Group is always to consider the long-term in all our planning, to follow our own path successfully, and to be a pioneer in our industry.
Our business model is clear, individual mobility in the premium segment. Cars are incredible products, because they benefit people in their daily lives and they reach out and speak to their emotions. More than 76 million cars were sold worldwide in 2013. The global automotive market will continue to grow in 2014. And the BMW Group was the number one choice for customers in the premium segment around the world.
This is proof that we deliver on our brand promises, whether it be BMW, MINI and Rolls-Royce. This is why the BMW Group has held the lead in the premium segment for about a decade now.
Just recently, BMW was named best corporate brand internationally in the German brand ranking, Best Brands. In Fortune Magazine’s ranking list World’s Most Admired Companies, BMW is the only German company among the Top 20 of 500 companies, and in the global industry ranking, our company was once again number one among automakers.
What you see next to me is the BMW i8. It embodies our company’s strength. The BMW i8 is not only an attractive plug-in hybrid sports car; it is also the world’s first series vehicle featuring laser lights.
In the future, a driver will be able to see not 300, but 600 meters ahead in the dark and the energy efficiency has increased by 30%. This innovation will definitely benefit customers’ needs. The first BMW i8 cars will be delivered starting in June, in Germany, the US, China, Japan and other countries. Our dealers all over the world tell us, they will easily be able to sell every single BMW i8 we produce.
Long-term profitable development is one of the key reasons people invest in the BMW Group. As we see it, profitability is a key element of premium. It gives us a firm financial footing. And it provides us with the leeway we need to invest and grow.
I assure you, we will continue to invest in the years to come. This is a commitment to guarantee the future of our company. BMW will turn 100 in 2016. Our vision laid out in the Strategy Number ONE leads up to the year 2020.
At the BMW Group, we have always based our decisions in long-term thinking. What will customers expect of a mobility company ten or twenty years from now? That’s what we are always asking ourselves, because the aspirations and needs of our present and future customers always come first. There are three points I’d like to talk about today.
First, how did we perform in the business year 2013? Second, what are our targets for 2014? And third, how can we ensure our long-term success in an ever-changing environment?
Let’s look at our performance. We generated a profit during the global financial and economic crisis during 2008 and 2009 and paid a dividend. Subsequently, the BMW Group achieved four consecutive record years. Our sales figures in the year 2013 prove that we continue to develop our business success.
BMW Group, 1.96 million cars, BMW brand, 1.66 million cars, MINI brand, over 305,000 cars, Rolls-Royce brand: 3,630 cars and BMW Motorrad, over 115,200 motorcycles.
These figures set new records for all our brands. We offer our customers a complete range in the premium segment from MINI to Rolls-Royce. In our core brand BMW, we were number one in four segments, the 3 Series, 5 Series, 6 Series and the BMW X1.
In 2013, the BMW Group enhanced the spectrum of its core brand: On the one hand, there is BMW i with its extremely sustainable cars. On the other hand, there is BMW M with its efficient, high-performance models.
BMW, BMW i and BMW M have one thing in common, sheer driving pleasure. It is sheer driving pleasure that our customers expect from us and it’s what we will continue to offer them in the future.
Valuable premium brands and desirable products also underscore our 2013 key financials. Group revenues stood at €76.1 billion. We recorded a profit before tax of €7.9 billion. Just as previously announced, this was on par with the result of 2012.
The net profit rose to €5.3 billion. This is the highest net profit in the history of the company. The EBIT margin for the Automobile segment remained within our expected profitability range. Our Financial Services business made a significant contribution to our success, posting another record result.
So, one thing is for clear – is clear. We deliver on our promises and we hit all our targets for 2013. I know that our associates identify with our company and our products. And it is this passion and relentless drive to create premium products that unites us all.
On behalf of the management board, I would like to thank all of our associates to their great commitment during 2013. It is their dedication that strengthens our company’s reputation, not only today, but in the future.
As a result, they too participate in the company’s success. This is and will remain a part of our corporate culture. All permanent staff in Germany will receive a profit-related bonus for the year 2013. This is the highest profit-related bonus we have ever paid to our associates. And it is also one of the highest compared across sectors and industries.
Ladies and gentlemen, we will strive to grow further. To achieve this, enhancing expertise in future technologies such as e-mobility and lightweight construction plays an important role.
First off, we offer extensive training to our associates. Since 2007, we have invested close to €1.5 billion in vocational training and professional development programs. This is key to us remaining an attractive employer.
In addition, we recruit new talent, a total of over 7,000 worldwide last year. 4,500 of our new hires were recruited here in Germany. This figure includes 1,700 temporary workers we have switched over to permanent positions.
At the start of the 2013 training year, about 1,300 young people began their professional careers with the BMW Group. This is to safeguard our own future and shows how we take responsibility for future generations.
Ladies and Gentlemen, the roots of our company are here in Munich and in Germany. BMW Group is a globally active corporation. We sell our products in more than 140 countries. We build our vehicles at 28 production sites in 13 countries and wherever we operate, we work in partnership with the region.
Our goal is to improve our understanding of our customers in all regions in the world even further. This is why the diversity of our customers is also reflected within our company. We take great care to ensure we have a variety of talent on board.
Today, over 90 nations are represented within the BMW Group. Such diversity makes us strong. As does having common values based on our tradition on our innovative strength and on our culture of cooperation. This sets the BMW Group apart from the competition.
Let me move on to my second point, what are our targets in 2014. In our strategy, we announced that we would sell over 2 million cars by the year 2016. We are going to meet this target earlier than planned. Our targets for this business year are as follows: first, we are aiming for a significant increase in deliveries, to be precise, a new group sales record of over 2 million cars.
Second, we will remain the world’s leading premium car company. Third, group profit before tax is expected to achieve a new record significantly beyond the previous year’s level.
Fourth, we are striving to maintain an EBIT margin in the Automobile segment in a target range of 8% to 10%. As you can see, we remain very confident about the business year 2014.
In the first two months of the year, we have already sold around 274,000 cars more than any of our competitors. This is the best start to a year we have ever had. Just like you, we closely follow global political and economic developments. Hence the world is very fragile and only one thing is certain, things can change very quickly, at any time.
So it is important to have a long-term strategy as a guideline for our own development within such a volatile environment. Our strategy enables us to clearly assess the numerous risks and uncertainties in our business and to respond accordingly. We regard challenges as opportunities taking us towards the success of tomorrow.
And a clear example of this is efficient dynamics. More than a decade ago, we set the technological foundation for our competitive advantage. Today, the BMW Group’s fleet includes 39 models with CO2 emissions of less than 120 grams per kilometer.
In 1995, our European fleet average still stood at 210 grams of CO2 per kilometer. In 2013, it was 133 grams of CO2 per kilometer, a reduction of 37%. By 2020, we want to reduce our fleet’s CO2 emissions by half from their 1995 level.
This brings me to my third point, how can we ensure our long-term success in an ever-changing environment? Being a pioneer means more to us than simply achieving positive financial figures.
A company that wants to remain successful in a changing world needs to break new ground while remaining true to its principles. For us, three elements are essential. First, balanced growth, second Innovation and third sustainable action.
In the world’s three largest regions, Europe, Asia, America, we are aiming at a balanced sales distribution. It’s a nice picture, what you can see. In 2013, we were able to compensate for the weakness of some European markets by further growth in the U.S. and China.
Our two largest individual markets, China and the U.S., accounted for a share of about 20% and 19 % respectively of Group total sales, our home market, Germany to around 13%.
In our efforts to tap into high-potential markets, we act in line with a sound principle, production follows the market. In 2014, we are strengthening our global presence.
In the United States, our Spartanburg plant is celebrating its 20th anniversary. Since 1994, we have more than quadrupled our sales in the U.S.
Today, BMW is the largest exporter from a NAFTA country. Today, sorry – starting this year, our Center of Competence for the BMW X models will also build the new BMW X4. Last year, we manufactured 300,000 cars at the site.
The U.S. will stay a market with great potential for us. This is why we are evaluating the possibility of increasing capacity in the U.S.
In China, we expanded our production capacity in 2013 by up to 300,000 cars. In the medium-term, we are able to increase production up to 400,000 cars annually if needed. Together, with our joint-venture partner Brilliance, we are planning a new engine production site, due to open in 2016. Then there is Brazil, in the fall of 2014, our new plant in this growth market will go on-stream, following a considerable growth in sales in 2013.
We are planning to build up to 30,000 units annually at this site. To achieve this, we are investing over €200 million and creating around 1,300 jobs and in the Netherlands, from the summer of 2014, the new MINI will also be produced by our partner, VDL NedCar.
The continuous investment in innovations ensures our long-term success. BMW i is an example of our innovative strength in several areas, the vehicle concept consisting of a Life module and a Drive module, the industrialization of carbon fiber in large-series production and the application of especially sustainable production procedure.
The BMW i3 is currently being launched in various markets. Customer demand is exceeding our expectations. By the summer, it will be introduced in the U.S., currently the most important market for electric cars.
To-date, we have invested about €600 million in our E-Mobility network thus creating 1,500 jobs. The comprehensive use of carbon fiber underscores our leading position in the field of lightweight construction. We are planning to apply this expertise also in other series models in the future.
We believe the electric motor is a future technology for zero-emission driving in urban areas. Battery technology will continue to progress. Our e-Drive technology brings together the following technologies today: electric drive trains and low-emission plug-in hybrids such as the BMW i8.
When it comes to emission-free long-distance driving, however, electric cars featuring hydrogen fuel cell technology offer great potential. Alternative drive technologies are key towards meeting the global CO2 targets in 2020. And the same is true for our products in the premium small car and compact car segments within BMW and MINI.
There is strong growth potential in the smaller vehicle segments, especially in Europe, and we plan to capitalize on this potential. So, the share of smaller cars in the global sales volume of the BMW Group will increase. And we must ensure that this growth also remains profitable.
In the future, we are going to produce our vehicles on two types of architecture, one for rear-wheel and four-wheel drives for BMW models and one for front-wheel and four-wheel drives for BMW and MINI.
This will enable us to achieve synergies between the BMW and MINI, the application of standardized module kits, cost savings throughout the entire process chain.
Ladies and Gentlemen, the most recent example of how we strategically address new customers and break new grounds is the BMW 2 Series Active Tourer. It is the BMW brand’s first model with a front-wheel drive.
In order to offer the customer greater functionality and flexibility, front-wheel drive is the best solution for this car. It will be available from the fourth quarter of 2014. Without a doubt, the BMW 2 series Active Tourer will offer sheer driving pleasure in this segment.
All in all, our customers can look forward to 16 new models and model updates this year.
The BMW 2 Series Coupé is even more dynamic than its 1 Series predecessor. It was launched at the beginning of the month. The BMW 4 Series Convertible can be driven all year round. It arrived at the dealerships in early March, right in time for the start of the convertible season.
The BMW 4 Series Gran Coupé will be available from June on. It is the latest member of our new BMW 4 Series. The new BMW X3 sets a new benchmark for interior quality. It will be available in April. From July 2014 on, the new BMW X4 will build on the great success of the X family in the premium mid-size segment.
The new M3 Sedan and the M4 Coupé will be the new benchmark for competitors. The launch of these two M models is scheduled for June. The new MINI blazes the trail for the future of MINI. The MINI Clubman Concept shows us a glimpse of the possible future development of MINI: a lot more space, a lot more fun.
With the Ghost Series II, Rolls-Royce has gently revised both the exterior and the interior of its successful model, fully in keeping with the brand’s exclusive heritage.
Ladies and Gentlemen, our vision for the year 2020 is, to be the leading provider of premium products and premium services for individual mobility. Even today, we are much more than just a manufacturer. We are clearly moving towards being a provider of attractive mobility and connectivity services.
This is what BMW ConnectedDrive and DriveNow stand for. With the realignment of the BMW ConnectedDrive services, BMW is extending its position as the leading provider of in-car online-based services.
Our focus is on driver assistance systems, including comfort and safety features and services, in other words, infotainment and mobility services. Our car-sharing program, DriveNow, is a success, especially with the younger generation.
Over 230,000 users have already signed up in five German cities and in San Francisco. The DriveNow fleet also includes 130 fully-electric BMW Active E cars. We are going to expand DriveNow to more cities in Europe and the U.S.
As a leader in our industry to more as the leader of our industry, we believe we need to act as a role model in terms of sustainability. It is a crucial factor in achieving long-term success. By 2020, we plan to reduce the resources needed to produce each vehicle by 45$% compared with 2006.
Ladies and Gentlemen, for us at the BMW Group, driving innovation and maintaining our financial strength are essential to our long-term success. In 2016, BMW will mark its 100th Anniversary, an historic milestone.
I promise, we will not be looking in the rear-view mirror, but focusing on the road ahead. We will be starting from pole position in creating and defining future mobility. Thank you very much.
Thank you, very much Norbert Reithofer and now, Friedrich Eichiner the podium is yours.
Ladies and Gentlemen, a warm welcome from my side as well. The BMW Group is the world’s most successful premium manufacturer. Last year the company was able to consolidate its global position, despite a challenging market environment in Europe.
Outside of Europe, however, the BMW Group reported strong sales gains. For the first time, we delivered more than half a million vehicles in Asia, 580,000 units. Sales also increased in the Americas and the U.S., in particular to more than 463,000. This sales success underscores our strategy of balanced growth worldwide.
Our focus in 2013 was on enhancing the company’s future competitiveness. The recently launched BMW i3 and its revolutionary concept underline our role as a pioneer of electric mobility. We will continue to build on our innovative strengths. To achieve this, we earmarked more funds towards capital expenditure and R&D in 2013.
The main focus of this spending was on series development of new models, further development of our efficient combustion engines and alternative drive technologies.
We also invested in making our sales channels more customer-focused. In 2013, we again saw dynamic growth accompanied by high profitability.
At Group level, our efforts resulted in a pre-tax return on sales margin of 10.4%, based on pre-tax earnings. Our earnings performance remained at the same level as the previous year.
BMW Group’s pre-tax earnings totaled €7.91 billion, a slight increase of 1.4% year-on-year, in line with our guidance. We had forecast that Group earnings for 2013 would be on a similar scale to those reported in 2012.
A strong fourth quarter contributed to our successful financial results with the highest quarterly unit sales in the history of the company. At €20.21 billion, BMW Group revenues were slightly lower, compared to the same quarter 2012. Revenues were impacted negatively by foreign currency conversion.
Group pre-tax earnings of €1.89 billion were a 7.3% higher than for the same quarter last year. With an EBIT margin of 9.3%, the fourth quarter of 2013 exceeded our expectations. The Automotive segment reported an EBIT margin of 9.2%. We were able to achieve this level of profitability despite extensive up-front investments in future projects and challenging market conditions in Europe.
With total capital expenditure of € 6.69 billion for property, plant and equipment and intangible assets, the company is providing the basis for future growth and long-term innovative excellence. We made product and structural investments in series production of BMW i models in Leipzig, Dingolfing and Landshut.
The upcoming 2 Series Active Tourer, based on the new front-wheel-drive architecture, and the 4 Series, with three derivatives, are further examples of product investment. We also invested in equipment and ramp-up for new MINI derivatives.
The BMW Group also expanded its global production network in specific areas. At our US plant in Spartanburg, South Carolina, we expanded production facilities for the X4 and the up-coming X6.
Spartanburg currently manufactures most of the BMW brand’s SAV models. Over the past ten years, the plant has built around 2.5 million BMWs. We are also considering increasing the plant’s capacity. Located in the world’s largest premium market, it is a decisive factor in the success of the BMW Group.
We also made structural investments in our new plant currently under construction in Brazil. In 2013, our joint venture in China also began construction of a new engine plant that will supply local vehicle production from 2016 onwards.
Total investment included capitalized development costs of €1.74 billion. At 36.4%, the capitalization ratio was higher than the previous year.
This increase can be accounted for by the larger number of vehicles in series development. In previous years, the capitalization ratio was slightly lower, since development expenses for BMW i products were reported directly in our income statement.
In 2013, the BMW Group’s CapEx ratio stood at 8.8% of revenue in 2013, exceeding our CapEx target of below 7%, as previously announced. The BMW Group’s growth is set to take on a new dimension. Our capital expenditure is gearing our production network towards higher total capacity and an expanded model line-up.
A total of 12 new and four revised models will be released onto the market in 2014. The BMW Group now has one of the youngest product line-ups in the premium segment. New models will ensure that this momentum continues. We expect our CapEx ratio to be lower in 2014, moving closer to our CapEx target of below 7% of revenue. This will remain our guidance for the period up to 2016.
Now let’s take a look at our research and development spending. In 2013, the BMW Group spent €4.79 billion, calculated in accordance with the German GAAP, on research and development, an increase of 21.3%, compared with the previous year. As a result, the R&D ratio rose to 6.3% as forecast.
We are working hard in preparation for stricter CO2 requirements after 2015, which represent a major challenge for us. We are responding early and will continue to be a pioneer in this field. We maintained our dual-track approach in 2013, on the one hand, refining our combustion engines to make them even more efficient and competitive, on the other, forging ahead with our development of new and alternative drive technologies.
The most important aspect here is e-mobility. In this area, we are refining both battery and fuel cell technology. This will allow us to offer emission-free driving for different ranges over the medium-term.
Our goal is to maintain the BMW Group’s leading position in technology and efficiency in the future. This is a central aspect of our premium concept. Lightweight construction and intelligent in-car connectivity were further focal points.
We expect our R&D ratio to be lower in 2014, closer in line with our target of 5% to 5.5% of revenue, which we are able to confirm for the period up to 2016.
Ladies and gentlemen, we also want our investors to share in the success of the BMW Group. At this year’s Annual General Meeting, the board of management and supervisory board will propose a dividend of €2.60 per share of common stock and €2.62 per share of preferred stock for the 2013 financial year.
In each case, this represents an increase of 10 cents over the previous year. It is the highest dividend ever paid. The resulting dividend payment totals € 1.71 billion. 32.0% of our net profit for the year will therefore be paid out to shareholders.
This means that our shareholders are currently earning a dividend yield of roughly 3.1% – or 4.1% for preferred stock. I would now like to talk in a little more detail about performance in the individual segments. First, the Automotive segment.
Ladies and gentlemen, 2013 Automotive segment revenues were on par with the previous year at €70.63 billion, although negatively impacted by adverse foreign currency conversion.
Adjusted for these effects, revenues increased by around 3.5%. Our business in Europe was also impacted by challenging market conditions. 44% of our total sales volume originated here in our largest sales region.
The general weakness in demand in Europe spurred more intense competition. EBIT in the Automotive segment totaled almost €6.66 billion, a decrease of 12.4% from the previous year. At 9.4%, EBIT margin for the segment remained within our target range of 8% to 10%, as forecast.
Here you can see the 2012 to 2013 reconciliation bridge. We were able to achieve a high level of EBIT, despite challenging conditions. Raw material and currency headwinds dampened earnings by €214 million.
Positive volume effects were overshadowed by intense competition in European markets. Changes to the sales mix impacted segment EBIT and depreciation also had a negative effect.
The balance from efficiency gains, up-front investments and higher personnel costs is recorded under the item other changes. Increases in efficiency partly offset higher impact for future projects.
If R&D spending, is included €840 million calculated in accordance with the German GAAP, our investment in future projects totaled more than €1 billion. The EBIT margin of 9.4% in the Automotive segment does not take full account of our operating result in China.
The at-equity result of our BBA joint venture is reported in our financial result. If this amount were included, our EBIT margin would be exactly 10.0%. Free cash flow in the Automotive segment totaled almost €2.5 billion in 2013. This was lower than the previous year, due to €1.5 billion increase in capital expenditures.
Nevertheless, at this solid level, we will be able to pay the previously mentioned €1.71 billion total dividend from our free cash flow fully underlining our operating and financial strength.
We expect an increasing free cash flow in 2014, despite further capital expenditure planned. The free cash flow should move closer to €3 billion. We are maintaining our target of more than €3 billion over the medium-term and should be back at this level by 2016.
The BMW Group’s liquidity position once again remained extremely solid in 2013. At the end of the year, Group liquidity totaled €10.72 billion. This assures the BMW Group the financing flexibility it needs for its operating business and growth.
For the first time, the Financial Services segment exceeded the €4 million mark in 2013, with a portfolio of 4.13 million financing contracts. A total of 1.47 million new contracts with customers were concluded in this segment in 2013, an increase of 9.7% over the previous year.
Overall, Financial Services leased or financed 44% of new BMW Group vehicles. The penetration rate was therefore 3.6 percentage points higher than the previous year. This increase reflects the dynamic performance of our Financial Services business in 2013, despite the volatile market situation.
BMW Financial Services made its strongest gains in the Asia/Pacific region, with a 23.6% increase in contract portfolio. In the Europe, Middle East region, the segment posted growth of 8.8%, while business in the Americas increased by 5.5%.
Financial Services reported pre-tax earnings of €1.64 billion and was able to increase earnings by 5%. The total business volume, as disclosed on the balance sheet climbed to €84.35 billion, an increase of 4.2% from 2012. The Financial Services segment achieved a return on equity of 20.2% in 2013, meeting our return on equity target of at least 18%.
Our balance sheet equity ratio stood at 9.1% at the end of the financial year, maintaining our solid capital equity position. The core capital ratios of regulated companies within the segment were even in the double-digit percentage range.
The Financial Services segment once again profited from attractive refinancing conditions in 2013. Owing to its financial strength and limited risk, the BMW Group was able to further improve its rating in December and is currently the only European automotive manufacturer with a long-term A+ Outlook Stable rating from Standard & Poor’s.
The Group has a broadly diversified mix of refinancing instruments at its disposal. Worldwide access to capital markets and a high credit rating ensure optimal utilization of financial resources.
Ladies and gentlemen, I would like to highlight a few of our BMW Financial Services business activities. Our fleet services provider, Alphabet International, managed more than 535,000 fleet contracts in the 2013 financial year.
Alphabet operates primarily in Europe, where it is the fourth-largest fleet management company. Its dynamic business development continued in 2013. Alphabet successfully integrated the first BMW i3s into corporate fleets last year as part of its AlphaElectric holistic e-mobility solution.
With this comprehensive service range, Alphabet is both a pioneer and major contributor towards making electric driving accessible to customers across Europe.
The expansion of the BMW Bank was completed in 2013. The Italian subsidiary was the last to be integrated as a branch of the BMW Bank. The German BMW Bank now – activities in the European markets of Germany, Italy, Portugal, Spain and France.
BMW Financial Services benefited from the stable risk situation in 2013. The credit risk situation continued to stabilize, thanks to the more positive development of the global economy. The credit loss ratio for our portfolio fell to 0.46%, two basis points lower than last year and back at its level before financial crisis.
Residual values for our off-lease vehicles also continued to improve. Used car prices trended upward slightly overall with the exception of Southern Europe, which only stabilized at a low level. Average losses from residual value risks thus decreased.
Financial Services made comprehensive risk provisions in 2013. Based on current assumptions, the segment appears well prepared for potential increases in credit and residual value risks. We expect the risk environment to remain largely stable, but cannot rule out higher volatility.
BMW Financial Services has set itself further growth targets for 2014 and will consolidate its worldwide product and service activities for individual mobility.
Let’s move on to our Motorcycle segment. BMW Motorrad celebrated its 90th anniversary in 2013. In its anniversary year, the brand reported for the third time in a row an all-time sales high.
Deliveries increased by 8.3% to more than 115,000 units, despite a downward trend in the segment above 500cc. Even in the challenging European market environment, BMW Motorrad was able to increase deliveries slightly and made strong gains in Germany. The brand reported double-digit growth in a number of overseas markets, including the United States.
At the same time, motorcycle production got underway at a second location outside of Germany last year. Now, BMW motorcycles are also built for the local market at the BMW plant in Rayong, Thailand.
The Motorcycles segment reported higher revenues and EBIT than the previous year, which had been impacted by the sale of Husqvarna. EBIT reaches €79 million and the EBIT margin climbed to 5.3%. BMW Motorrad will continue its product offensive in 2014.
For the first time, our brand will also have a pure-electric vehicle, the C evolution maxi-scooter, on the market. Five other new models we presented last autumn will be launched this year including the R nineT anniversary edition, the S 1000 R naked sport bike, the touring bike R 1200 RT and the R 1200 GS Adventure as a variant of our successful long-distance enduro. Another new release will be the K 1600 GTL Exclusive.
With these attractive new models, BMW Motorrad is targeting sustained growth in its core segment and in the field of urban mobility.
Now let’s finish with a look at Eliminations. Inter-segment profits, mainly between the Automotive and Financial Services segments are eliminated under this item. The impact on pre-tax results from eliminations was a negative €527 million.
This result represents an improvement of €410 million from the previous year, largely due to eliminations of intra-Group profits on leasing contracts.
Ladies and gentlemen, the BMW Group has set itself ambitious growth targets for 2014 and strives to remain the world’s leading premium car company. Our new models and the dynamic market environment in North America and China will provide positive momentum in sales volumes.
A steady upward trend is forecast for the European automotive markets, also our business development could be affected if this fails to materialize. We expect our positive business development to continue in 2014.
In line with the new standard regarding the combined management report, I would now like to qualify our business expectations in a little more detail. The new DRS 20 standard, established by the German Accounting Standards Committee, concerns primarily the forecast and risk and opportunities report.
It requires more accurate forecasting during a shorter forecast period and a more precise guidance on anticipated changes in our key performance indicators. Assuming, economic conditions remain stable, Group profit before tax is expected to be significantly up on the previous year’s figure.
As long as economic conditions remain consistent, we anticipate a significant rise in deliveries to a new high level. Our planning is based on a steady recovery in the European markets as forecast, with significant growth in markets outside of Europe, including high single-digit growth in North America and low double-digit growth in China.
Our guidance could be changed if this does not occur. As a result of the large number of model launches, we expect sales in the second half of 2014 to be higher than in the first six months.
Automotive segment revenues are expected to increase significantly in line with demand in 2014. However, currency factors could have a negative impact on revenues.
In the Automotive segment, despite high up-front investments and capital expenditure, we aim to achieve an EBIT margin within our target range of 8% to 10%. We are sticking to our targets. However, if political or economic conditions become less favorable, actual margins could be below the targeted range.
In the Financial Services segment, we expect our return on equity for 2014 to remain at least at 18%, as in previous years. Based on current planning, however, we forecast a slight decrease in return on equity compared with the previous year as we make the necessary investments for further growth in this segment.
From today’s perspective, it appears that the segment has made adequate provisions for the risks associated with Financial Services business.
Our BMW Motorrad business should continue its positive development in 2014. Despite persistently – we expect that deliveries of BMW motorcycles are slightly up on the previous year. Our attractive new model line-up will contribute to this.
The guidance assumes that overall political and economic conditions remain mostly stable. Further risks stem from the continued high levels of national debt in certain countries and the economic slowdown in emerging markets.
Ladies and gentlemen, the BMW Group looks towards the future with confidence. Our strong premium brands and attractive products place us in a position of strength. We are taking the necessary measures today to remain not only competitive in the future, but to expand our role as technology leader in the premium segment. This is what sets the BMW Group apart from the competition.
Thank you very much, Friedrich Eichiner. So ladies and gentlemen, we start our Q&A session. We have time approximately one hour until a quarter to twelve where we start Kristina first and then Frank Biller, okay, Christina.
Kristina Church – Barclays Capital
Yes, thanks, Christina Church from Barclays. My first question is related to the dividend and your payout ratio. I know in the past it started being between 30% and 40%. Is there anymore guidance you can give on whether you expect to get closer to the upper end of that range?
Second question is going back to the EBIT bridge and the other changes that feature one cost, I know we’ve got some feelings whether it might go to in 2014, but what should we expect further up for those costs?
Should we start to see those significantly coming down or still more close and also in addition to that, what exactly changed in the last few months of the year that really did see those costs come down, not be as high as you previously expected? Thank you.
Thank you, Kristina. Mr. Eichiner.
Well, your first question Christina, dividend development, so first of all, I think we confirm that we want to stay in a range of 30% to 40%. This in combination with the guidance that we are expecting significant growth on the profit side should open up room to maneuver for the dividend.
That’s how I look at it but the final decision of course has to be taken on regard the report for 2014. So that’s how we look at it and then the EBIT bridge, 2014 and your question, what you should expect about future investments.
I mean, we disclose that 2013 and 2014 are years where we have extraordinary effort to carry in order to protect our position beyond 2015, but because have to be prepared, for example, to deliver the CO2 targets. And for this, we plan in 2014 also an extra burden and our expectation is, it’s possibly around the same number we’ve seen in 2013 may be a bit higher that’s how we look at it.
And your last question, what happened in the last quarter, basically and the market didn’t well perform in Europe as we expected in 2013. The management decided to actively work on the cost side.
So we brought efficiency gains in – we got a lot of restructuring in and had also on the purchasing side gains. So the company was in a position to offset the extra effort we had to take in order to develop our products into the future. So that is the background.
Thank you very much. Next one is Frank Biller, and then Horst Schneider. Frank.
Frank Biller – Landesbank Baden-Württemberg
Yes, hello, it’s Frank Biller from Landesbank Baden-Württemberg. It’s two questions. The one question is concerning the Chinese development. You are estimating a growth rate of more than 10% for the Chinese market. So what is your assumption for BMW Group here? Is it more than 10%? Is it more in the range of 15% to 20%? And what are you assuming here?
And coming to the national or international footprint, taking this strong growth rate in China, what is your mid-term target on a regional basis in regional split of sales here? And the second question is again on Chinese joint ventures. So you talk about an operating margin of 10% including the Chinese business.
So I cannot follow your calculation here without taking 9.4% for the auto side and adding a net result of Chinese business and not adding any revenues here. So what is the figures just including an operating earnings from the Chinese business and including the Chinese revenue line here, what is here then an adjusted figure?
Well, the question about the expected growth in China. I said it already, it should be double-digit, but to make it clear, double-digit doesn’t mean that we are expecting more than 20%.
So it’s a lower double-digit number we are looking at. And then, your question about the number we disclosed in my speech, well, what we see is that the joint venture is growing and is absorbing more and more of our business in China.
That is our strategy as you are aware of that, we disclosed that and we give – and we see the profit in the joint venture reflected in the equity accounted result. So, and I just gave you a calculation because some competitors are handling it in a different way, to give you the right comparison, that's all. And going forward, actually we stay how we report our financial numbers for the Chinese business.
Okay, next one, Horst Schneider and then Andt Arndt Ellinghorst. Horst, where are you?
Horst Schneider – HSBC
I am here in the middle.
Horst Schneider – HSBC
Yes, if I could ask five questions. First of all, on your market guidance for 2014, it strikes me it’s the most optimistic guidance that we get from a carmaker here in Europe, Renault guides for plus 1.9%, Volkswagen for less than 4% globally.
You guide for 4.7% growth. I think this guidance was made sometime ago beginning of the year in between we had the emerging markets something a little bit. So, would you say from today’s perspective this growth globally is an optimistic assumption or still realistic?
And I want to know then also in that context how would you expect the premier market to grow and if you still expect to outperform the premier market in 2014? Then another question on the front wheel architecture, you have been, I mean, you have not yet quantified to which extent the profitability will increase by the launch of the front wheel architecture.
So maybe you can give us some more hints in which direction now the small car range is going? Is it still diluting the mix significantly? Or are we moving closer in terms of margin with the small cars now to the Group or Automotive segment average margin?
Then the last question that I have is, an update on Q1 and how we should think about the allocation of the one future expenses this year. So will it be as last year that it will be rather back-end loaded, hope mainly in Q4.
I mean, it was not the case in the end in 2013, so therefore strong to say that now, but you expect from today’s perspective that these expenses will be booked more in Q4 will be evenly allocated in 2014 and you would either try to assume that Q1 will be rather a weak quarter and Q4 will be rather, I mean, the best quarter in terms of margin also in 2014? Thank you.
Thank you very much, Horst. We start with the first complex of the question, Norbert Reithofer.
If I compare our most important regions, I mean, the United States will be above 16 million cars, it can be 16.2 million cars, China will be above 17 million cars and Europe will be approximately on a level of 12.5 million cars. I mean, you are – market guidance, we are very optimistic you said as it comes to Europe.
I mean, we see a stabilization in Europe coming from a low level and we see of course growth potential as well because of our – I can say in numerous product launches. I mentioned the BMW 4 Series Gran Coupé, I mentioned the BMW X4, I mentioned the model update of the BMW X3, I mentioned 2 Series Active Tourer.
I mean, we have product momentum as well. And of course, if you see the market – I say it again, in the U.S. more than 16 million cars, we count on the U.S. of course. If you see in China more than 17 million cars, of course we count on China and we see Europe is coming back but very slowly.
So, but, again we have product momentum as well. And we invested for the product momentum if we are not able to sell the cars, our return on investment will not be very good. That means we have to sell the cars and we have to make out of it our success.
Thank you very much, Mr. Eichiner.
Your question about front wheel drive architecture, first of all, I want to explain how we look at the profitability of the portfolio. It’s not just looking at one architecture, the target is that the portfolio of the BMW Group product is balanced when it comes down to profitability.
Having said that it means, we know that we are adding cars on the lower end, at the same point in time we are looking at opportunities in the middle-end and on the upper end and that’s how we want to balance the profitability overall and that is still the approach going forward and I think we will support what I am saying with the announcement later on in the year.
So that’s how we look at that portfolio. We are not disclosing specific profitability targets on certain model lines. That’s what we don’t do and actually, we think with the approach we have taken to bring at least ten cars or even more on one platform on one architecture front wheel drive, this is the best approach of BMW to support economies of scale and to reduce the one-time effort.
And we still think that this is the right approach going forward and as you can see, we still support and confirm our margin going forward at 8% to 10% up to 2016 and that also demonstrates that we have the right balance in its ability. So that was my remark about this.
Then, talking about the first quarter, as you know, we always have a hockey stick effect I call it this I the first quarter. Why? Because many projects are targeted to be realized at the end of the year, especially in the R&D area and then we have to pay the bills so, we beget the cost in.
And this is a pattern we’ve seen over years and it’s the same pattern I am expecting for 2014 as well. So I cannot confirm now specific profitability numbers for certain quarters. As Dr. Reithofer has demonstrated, I think we had a good start into the year 2014. Up to February, we could generate growth and there is more to come, because we are expecting more launches now to be realized.
So, my expectation is that the product momentum will generate a positive result and a good profit in the first quarter as well.
Horst Schneider – HSBC
And add-on regarding the front wheel architecture, I understand that you don’t want to share too many thoughts on the profitability of the range, but these economies of scale that will be certainly higher in 2015 than 2014, that is right to assume and in 2014 it’s right to work with the assumption of the mixed dilution regarding EBITDA, right?
As I said, that we have the right balance in the portfolio. Our assumption is that the mix will be improved in 2014. Despite the fact that we are launching many products, but we are launching X4, as many 4 Series are coming to the market and so on and so forth.
That’s what I said right in the beginning. We are looking for a portfolio management approach to this in order to balance smaller cars against the bigger cars if you will. And so that is delivering what we are expecting in 2014. So in 2014 we are looking for mix improvement.
Horst Schneider – HSBC
All right, thank you.
Okay, thank you very much. Next one Arndt Ellinghorst and then Mike Michael Raab. Arndt?
Arndt Ellinghorst – ISI Group
Thank you very much. More structurally, how do you expect your earnings performance to progress over the next couple of years really, looking into 2016 when BMW turns 100 years to combine all your different drivers, I guess, costs are coming down, your revenue of product momentum should continue to be better probably. And in that context, can you talk about your ambition to pay a special dividend in 2016 for 2015?
Secondly, Dr. Reithofer, you showed an interesting chart with your global balance unit sales footprint. That’s very nice, it’s a great achievement. Unfortunately we can’t see the earnings breakdown.
Your global peers are reporting that I know you don’t look at the world like that internally, but it is one of the biggest topics that we discuss with investors when it comes to your exposure.
It’s the biggest criticisms always you are overly exposed to China, and you would just stop that debate by reporting your earnings, let it be EBIT or pre-tax or both on a regional basis which I honestly believe is a much better reflection of your business. How do you think about that?
Okay gentlemen. I think we start with special dividend in 2015 or the 2016 with Eichiner.
Basically, as you heard today, our plan is to grow the business further and we already confirmed that the 8% to 10% is margin we want to deliver going forward. So with the growing business environment, and a stable margin corridor, the outcome has to be a positive on the profit overall in absolute numbers going forward.
So that’s still our target that we want to in line with the growth generated in the market, the profit should be growing as well. So that’s what we want to achieve up to 2016. A special dividend, we all know 2016 is a very important year for us and we never ruled out that if 2015 is a very good year for us, that we would think about things like an extra dividend.
But it’s not yet decided and we don’t have the profit of 2015 in our pocket, but if it allows it, I think the Board will discuss about it.
Okay, Mr. Reithofer, second one?
I mean, your question regarding the year 2016 and beyond. I mean, I mentioned during my presentation, in the year 1995, we had about emission of 210 grams CO2 per kilometer. We were able to achieve in last year, 133 grams CO2 per kilometer. We have to achieve in the year 2020 in Europe roughly 100 grams CO2 per kilometer. So what does it mean?
If you use cars with combustion engines, even if you use three cylinder engines, you will not be able with our mix in Europe to achieve 100 gram with conventional technology. What this means, you have to add cars like the BMW i3, you need plug-in hybrids.
I mentioned, you need more compact cars and small cars that means our compact and small cars segment will grow above 40% and we need more than 40% to achieve the 2020 target in Europe.
So then, you have countries like the Netherlands, like Belgium, like France, where you have a bonus in mileage system and the target for a bonus is already 85 grams and not 100 anymore. So what does it mean, you have to be very innovative, you have to spend a lot of money for technology to achieve the target for 2020.
And what we have on the table at the moment, the so-called good result for the car industry for year 2020, I mean, it’s not really and that was a car industry if you see the year 2020. And that is for me that will be for me a real cost factor for the BMW Group beyond 2016.
That means, we are not yet there. I say it again with the conventional technology, that means combustion engine, we can achieve, we don’t know yet exactly between 110 grams and 115 grams.
So, we need 10, 15 grams more to achieve the target in 2020 and we need BMW i3s, we need BMW i8s, we need X5 plug-in hybrids to get there. So – and that will be, I don’t know how you say it, the real cost factor for the BMW Group beyond 2016. We are not yet there.
Thank you very much. Michael Rabb and then Christian Breitsprecher.
Arndt Ellinghorst – ISI Group
No, no, sorry. You didn’t answer my second question, when it came to regional breakdown of EBIT pre-tax in future.
Arndt, I should say this is the proposal from your side, I said this we think about it. So far we don’t have it disclosed in our reports, but we gave you already a guidance that the Chinese contribution overall is in a range between 20% and 30%. And it’s – I can tell you exactly in that range. That’s what I can tell you.
Arndt Ellinghorst – ISI Group
Michael Rabb – Kepler Cheuvreux
Yes, right Michael Rabb, Kepler Cheuvreux. Maybe just three quick questions right over here. First of all, given what you said about your expectations for the sources of growth you believe to enjoy globally this year.
We could be of the impression that there could be significant growth if the upper end coming from export market and a lot of growth at the lower end, coming basically from the combination of furnished product in European recovery. Is that sort of a fair assumption?
And how do you think about pricing in the respective markets of North America, China and Europe respectively for this year? Then, Dr. Reithofer you mentioned earlier that you think mid to long-term there is a lot of growth potential, is that compact in Europe as I understood that correctly.
Would that be add-on growth or would that be structural shift from the mid-size to the sub-compacts and compacts respectively? And then finally, talking about your rear wheel architecture, can you just update a little bit on where we stand, obviously with the de-coupling of the one from the free series that moving that to UK, there is more leeway for additional harmonization for the mid-sized and large cars and when would you expect the peak spending for that? Thank you.
Thank you very much. First part will be answered by Mr. Eichiner.
Well, I think you are right. That’s what we are expecting and talking about different markets with different opportunities where in Europe, we see a more downward trend, so we need as we have already smaller cars in the UK segment to grow and to support our CO2 targets.
Other markets are still pulling that more attractive models we are in a good position with a brand new X5, brand new X6 for example and some of the new models that are on high demand all around the world. So this is the reason why we think overall mix should be slightly improved and we are able to stabilize the portfolio despite driving the mix a bit more than market.
So – and the last one was your question about pricing. The pricing – our assumption is with top new models in the market and additional four – it was possible to improve pricing in 2014. So that is one of the assumptions in our guidance that guidance should be improve – that the pricing could be improved, up to let’s say 100 basis points.
I mean your question regarding compact and sub-compacts, I would like to start first with our bigger cars and then come to your question, compact and sub-compact vehicles. In Europe, we do much more than to launch small cars.
We will introduce the smaller BMW X5 to support the engine with a four-cylinder engine to improve our mix, because, even in Europe, from a profitability point of view we cannot just live if we sell MINIs and One Series BMWs. We need bigger cars as well.
And our strategy is to offer more smaller cars to be able to have the opportunity to offer on the other side big cars as well the X5s with Six Series Gran Coupés and so on. If we don’t have more smaller cars, and if we don’t have i3s as I mentioned it before and plug in hybrids and cars like that, we will not be able to achieve our CO2 targets for the year 2020.
So that means, it’s not – I should say it’s not an opportunity for us we have to do it. That means, we have to offer more compact cars, more sub-compact cars. We have to offer i3s, but, of course we would like to sell X5s as well.
And a lot of customers, they ask not for six cylinder petrol or diesel engines anymore for an X5, they ask for four cylinder engines, especially in the European Union. It means, it will be a mixture offered by the BMW Group, not just small and subcompact cars, we have to be able to balance on mix as well in Europe and we need as I said, cars like the i3. It’s a very important part of our strategy.
Michael Rabb – Kepler Cheuvreux
I perfectly understand that rational behind your argument and I would share it, but my question was actually more from the demographic angle, given that revenue over aging societies in Europe, where trend-wise, please correct me if my observation is wrong, elder people tend to choose rather compact cars coming from a mid-size segment beforehand?
Okay, I understand. I mean, the very important product, I know exactly what you mean though, thank you, is the 2 Series Active Tourer, for example, I mean, I know a lot of elderly people and they ask us more and more when will you offer a car like the Mercedes B Class.
So, – and we will have a product in the second half of 2014 since the 2 Series Active Tourer, we will launch an additional product in the year 2015, a bigger version of the 2 Series Active Tourer and those cars are especially for elderly people. About 70%, 80% of the future customers of Active Tourer are not yet BMW drivers.
We are talking about new customers, I mean, you ask the question substitution, yes or no, 70%, 80% new customers, by the way the same is true for the BMW i3 as well, 70%, 80% new customers for the BMW Group and not substitution. And as I said, especially the 2 Series Active Tourer a very, very important product to conquer new customers for the BMW Group.
Thank you very much. Christian Breitsprecher and then Laura Lembke. Christian
Christian Breitsprecher – Macquarie
Christian Breitsprecher, Macquarie. I have two questions, one, again relating to the future related costs, just to make that crystal clear, when you are talking about higher future related cost in 2014, does that mean that we have – where we think in terms of an EBIT bridge that the negative impact on EBIT year-over-year will be higher in 2014 than it was in 2013.
That’s the first question. The second question on your joint venture in China, could you talk a little bit about the earnings prospects there. I mean, you have also there a lot of future related expenses, rising R&D expenses, you are building up a new engine factory, what should we expect in terms of earnings development of the joint venture in 2014.
And also in terms of margin development, because we are going to see a nice volume growth, but is profitability going to improve margins up or down, what should we expect there? Thanks.
Yes, as I said, future costs are relevant for 2013 and 2014 and in 2014, our calculation is that the costs are around the level we’ve seen in 2013. So that’s a mid-range three digit million number and it could be a bit more, it’s hard to say right in the beginning of the year where all the programs are still not yet finalized.
But it will be at least at the level, let me say it this way around of 2013 in our actual calculation. Now, your question about the development of the joint venture in China. As we said, that we expecting double-digit growth in China. This is of course relevant for the development in a JV as well.
So they will benefit from the market growth over there. The cost in a joint venture are selling very well and so we are expecting respective growth number in our Chinese business and so far, I have no reason to believe that the profitability would go down. So my expectation is that profitability should be on a similar level as in 2013.
Christian Breitsprecher – Macquarie
If I may follow-up there, so profitability at the same level as in 2013 would mean similar margin in the joint venture or similar absolute profit? That’s one thing, and the second thing, on my first question. So that means we have no incremental burden in 2014 from the future-related cost when we think in terms of the year-over-year EBIT bridge?
Yes, we have and in the order magnitude we had in 2013. That was what I want to do pass over to you. So we have an extra burden compared to 2013 and it is at least at a level we’ve seen it in 2013, just to make that clear in a EBIT bridge.
Christian Breitsprecher – Macquarie
Incrementally year-over-year, okay.
In a EBIT bridge, and to make clear what I want to tell you about JV, what I said is, we are expecting growth in a joint venture and I see the margin fairly stable. So that would be what I want to tell you.
Laura Lembke and then Jochen Gehrke. Laura?
Laura Lembke – Morgan Stanley
Thank you. I have three questions please. The first one would be on your guidance. I think we all use too much more conservative tone at this early stage of the year and I guess the change in the way you give guidance is probably also driven by DRS 20.
But I am just wondering, would it be fair to say that the guidance you’ve given this time even though we seem very confident about it actually includes more risk than what you have communicated in previous years and my second question is also is on Financial Services.
So I am just wondering, given that we are seeing a lot of regulatory headwind, do you think the division is adequately capitalized into the Financial Services entity? And then the last question is for Professor Reithofer, I think you are early to recognize…
Without Professor. In the moment, without, in the moment, Doctor, it’s okay, but you can say also Norbert.
Laura Lembke – Morgan Stanley
Okay, for Norbert then, so, I think you are early to recognize the treat from CO2 regulation and I think with efficient dynamics you kind of were able to get a bid of a leadership situation in the industry.
Would you say that when you look at around at your peers and compare how much you are spending on this topic compared to some others that you are actually on a very good track to carve out competitive advantage again?
Thank you, Laura. We start with Mr. Eichiner and then Norbert Reithofer.
Well, the guidance, and our way to communicate, I don’t think that we are changing our way to communicate when it comes down to conservatism. It’s – we want to stay like this, because we want to make sure that you can rely on what we say and that we are able to deliver what we are telling you. So that’s still the attitude we had over the last couple of years and it should stay like this.
Of course, and that’s what I have to admit, under the new regulation of DRS 20 we have to be more precise. Based on our internal planning, our regulators are asking us to give you much more precise, well, guidance on our key performance indicators. And so, we’ve been looking for the right definition of this.
And so, just to make that crystal clear, when we are talking about a significant increase, in the new BMW speech now, right, this is an increase at a high single-digit number or a low double-digit number. So from high single-digit into the double-digit range, that is when we are talking about a significant increase.
So you should not think about 20% or 30%, but just want to make this crystal clear in order that you understand the guidance well. So that first question, the second one, Financial Services, over the years, fortunately we could improve our equity within Financial Services with 9.1% equity on the balance sheet, I think we are very well capitalized and in a regulatory unit.
So in the BMW Bank for example, we have a double-digit equity ratio. So that is even better and so far we don’t see any need to inject further equity into Financial Services.
Last part of the question Mr. Reithofer.
I mean, as you can imagine, I cannot speak for our competitors. I can only speak for the BMW Group, but if you remember, we had a auto show in Frankfurt in 2007. And I mentioned that several times the word Efficient Dynamics and I think a lot of you thought this Reithofer, this new production guy now as Head of BMW is a bit cuckoo to mention Efficient Dynamics and CO2 emissions so often.
But, even in 2007, you could see what will happen in the year 2020 and beyond and we don’t know yet will we have a target in 2025 of let me say, 70 grams CO2 per kilometer and it comes on top a new regulation and it’s caused real driving emissions, that means it will change how we measure CO2 emissions in future and it can be an additional burden for the car industry.
The European car industry ACA, we try at the moment to move it, let me say at least to the year 2020 real driving emissions. The European Union, they think 2017 is a good introduction year to a real driving emissions. So, and what about the preparation phase of the BMW Group?
In my opinion, we are on a good track. I will not say yet and I am a conservative Bavarian. We are already on a very good track, we are on a good track. But as I said, we need as well for the year 2020, BMW i3s and plug-in hybrids with conventional technology, the BMW Group will not be able to achieve the 100 gram CO2 per kilometer.
Not thinking even beyond about 70 grams and on top real driving emission regulation. So this means even for us, it will be a cost burden beyond 2016 to achieve the targets in 2020. Are we good prepared? Yes, we are good prepared. And I mean, it was a reason behind to introduce two new car architectures especially the one for front wheel drive vehicles.
And Mr. Eichiner mentioned, we are talking about 10 BMWs and MINIs can be 12 as well in the future. So we need a BMW i3 hybrid as I said it. So, all in all, beyond the year 2016 we have still to invest a lot of money to get there. Was it a good answer for you?
Laura Lembke – Morgan Stanley
Thank you. Yes.
Thank you very much. So next one, Jochen Gehrke and then and then Philippe Barrier.
Jochen Gehrke – Deutsche Bank
Yes, Jochen Gehrke, Deutsche Bank. Three topics if I may, first of all with regards to China. You talked a lot about regulation, there seems to be at least currently the ambition to separately treat imported vehicles from domestically made.
Now China isn’t known to be very far reaching when it comes to final conclusive regulation, but what does that mean for BMW’s planning if this were to happen would you think about locally producing many of your higher end vehicles or would that mean that we are changing the import mix and you would rather look at import more of the lower end mix as well.
And then secondly with regards to the FX expectation, discussing with your someone your colleagues, I understand that you are targeting about the same level of impact on the bridge as what you had in 2013. Many of your competitors are breathing a lot more heavy when it comes to FX impacts in 2014. What are the assumptions behind that?
Are you factoring spot rates and I appreciate all the volatility that is currently in the market if you could shed more light on that? And then, really finally, with regards to your look on the European market and coming a bit – back to what answered about your regional profitability.
Shouldn’t we be thinking that structurally within the next ten years, we moved into Europe into a complete new year end technology normally that shouldn’t mean that margins go up rather they go down that you are increasingly reliant on markets outside of Europe. And if regulation really comes as strict as yourself stated it could be, would it mean that investments at BMW get shifted more and more outside of Europe and you rather want to bid capacities outside? Thanks
Thank you, Jochen Gehrke. Mr. Eichiner?
We start with the FX part. So, what I can tell you is that we are very well hedged with the major currencies, so the dollar, the renminbi, the British pound, the yen, that’s all fine. Right, where we still have some concern is for emerging market currencies. We know that the business there is not as big as in the major markets.
But the fluctuation is high. So, and that's an area where maybe an additional risk could come, but having said that, we feel quite comfortable with what we‘ve achieved so far for all the other major markets and currencies and that’s a basis of our guidance today.
Then, margins going forward, of course the regulation will have an influence on costs, because as we heard from our CEO, a lot of effort has to be undertaken in order to bring the CO2 emission per car down, that means we have to equip the cars with new technology that has a cost.
So, one question will be how much price – resolved, because the cars are not yet in the market, we have to see that. I think we have taken a good step with the i3 so far with the introduction. That is one issue that is not yet answered and this will clearly influence our profitability in Europe going forward. Looking at Europe overall, we don’t have only the CO2 grant.
We have a demographic grant and we have the question today already as well. So the European markets are not growing anymore because demographically they are not growing like Germany. And this is the big difference compared to other markets like U.S., like China, and that’s the reason why we are following the growth in those markets. So our expectation is our investments will be more driven into those markets where the growth is going forward.
I would like to add one point for all of us. The European Union, they would like to achieve 20% part of the industry of cross-domestic products in the European Union, 20%. How is the acting process at the moment? They will achieve less than where we are today and in my opinion, to be straightforward, we lost the balance between competitiveness of our industry in Europe and environmental targets on the other hand.
So we lost the balance. And it’s about time to come back to a balanced situation between competitiveness of the European industry and environmental targets and if we don’t do that, we will never ever achieve the target of 20% industry as part of the GDP. And let me add one point, at the moment, we have by far the tougher environmental target for the car industry of all regions worldwide.
If you compare the European Union with the United States, if we compare that European Union with China, if you are able to achieve the targets in the European Union, you will be able to achieve China, but of course we would like to have still a better mix in China and in the United States.
So, in my opinion, the United States and China, we will be able to achieve and we will have still a very good mix. So, but the European Union, is a real challenge. By the way, the energy costs come on top. So, and it’s a mixture, it’s not very favorable for the European Union if you think ten years ahead. That is my honest opinion.
Philippe Barrier and then Stefan, well, sorry.
Jochen Gehrke – Deutsche Bank – Analyst
Sorry, here. What about the Chinese bid between regulating imported vehicles versus domestically made? How you would respond? What do you feel comfortable that in the imports you could actually be as efficient as the domestically made?
Well, I think we have enough cars in our portfolio to mitigate that risk. So, talking about purely electric cars like an i3, also smaller cars we have, talking all the MINIs it will definitely not be part of our localized fleet so far. So, we are carefully managing this. But, it seems that we have enough levers on our side to mitigate the risk for the import fleet.
Thank you. Philippe Barrier and then Stefan Burgstaller. Philippe?
Philippe Barrier – Societe Generale
Yes, thank you. Philippe Barrier, Societe Generale. Two questions if I may. First question regarding the positive factors in 2014, you mentioned some lease contracts as well as upfront investment in 2013 compared with last year.
The positive side, could you see some what you think in purchasing cost or commodity price given the present price of steel for instance and second point on the efficiency gains, we will see some higher efficiency gains which may offset the part of the higher upfront investments.
So on the use of synergies in the bridge, could we see some bridged impact coming from additional efficiency gains in 2014? And the second question is regarding the CapEx. Actually you mentioned that CapEx may be lower in terms of revenues, – what should be the absolute level of CapEx in the coming years and at the same time in your presentation you mentioned that the priority should decrease, the difficulty drop in 2014 compared with 2013 what are the assumptions between the decrease in the capital invested in 2014?
So, first question about the EBIT bridge and efficiency gains, well, we believe that a part of the additional effort we have to undertake in order to develop our product portfolio into the future will be compensated by efficiency gains and they are coming out of process efficiencies, structural changes.
For example, we changed, we centralized the whole IT responsibilities worldwide working on structures organizations processes and of course also on the purchasing side as we now have more and more cars sitting on one architecture.
We are looking for gains in this area as well that are factored into our guidance and that it help us in order to offset the extra burden we have to carry going forward in 2014. So that’s factored in when I look at a number I gave to you. So that was the first question and then CapEx, we think that the CapEx ratio will come down.
We don’t think today that CapEx in an absolute number will grow significantly. We don’t think that next year. So, as we said, already last year, we have some outstanding years now 2013 and 2014 where we need more in order to protect our position going forward in order to invest into new capacities and that should come down and the ratio will definitely come down.
And I don’t think that we will see an absolute number that will be much higher than this year. So that’s how I look at it today. And then your question I think was about the return on equity guidance I gave for Financial Services. So…
Philippe Barrier – Societe Generale
At the Group level, it was – I think slight, you mentioned that you expected a significant drop in the return on capital invested at the Group level in 2013?
Yes, well, so there is – with the growing environment in our calculation that the capital employed will be higher next year and that is the reason that the ratio is coming down. But we have to see this is still at a very high level and far beyond the target of 26%, right.
Thank you very much. So we have time for two additional questions I think. Stefan Burgstaller and then Jose Asumendi.
Stefan Burgstaller – Goldman Sachs
Thank you, Stefan Burgstaller from Goldman Sachs. Actually try three if I may. First I would like to explore the content of sustainability not from an environmental point of view, but from an economical point of view.
It seems to me that’s a very important issue now the market is now get its head around if we think about investing in the BMW Group, particularly in light of the discussions of regulatory headwinds in 2020.
So just bear with me. So, yesterday you said that rounded you need to reduce CO2 down to 100 gram for the fleet, that’s 33 grams reduction and I get it we have mixed benefit, got the plug-ins.
The i3 is ready. It’s about the super credit, the fleet management system is in place, you could scale it probably quite quickly to help you reduce the overall CO2 level. But I guess you have now the data point about how much the last 33 grams cost you and I would contend that the next 33 grams are going to be more expensive and when we then look through that, what’s changing in the next six years, the tailwind from China is likely to be less in terms of tailwinds through the consolidated profits.
The benefit from introduction of modular systems is likely to be less. I know that the modularization comes in the power – but doesn’t seem to be as powerful sitting from an observers’ point of view introduction of modular structures.
And so I am wondering, I get it that from a technological point of view you are very confident you will get there. But from an economical point of view, are you as confident or is it still a big workload for the management team. That will be my first question.
Secondly, in the same way but maybe more granular, when you look at the life cycle, they have to trend potentially trend that life cycles industry are shortening. Yet at the same time, your production system the cycles are lengthening with the introduction of modular system.
And so while initially you get huge benefits when we go on to modular system, but then how will make sure that you capture the productivity gains which usually are available to the industry if we don’t have system changes?
And then finally, it may be a very long-term question, you talked about in your speech Dr. Reithofer about the offering in mobility services and connectivity. Today, it sounds already futuristic, but it may probably in the next decade becomes a reality, but how do you ensure that the car industry is not facing the same destiny than the handset makers.
Okay, thank you very much, Stefan. I think we start with Mr. Eichiner and then Norbert will give an strategic overview about your whole question.
Yes, the whole debate around CO2, I think you touched a point that of course every additional gram we have to realize is an extra burden. The low hanging fruit is already sorted.
So that’s definitely true. I mean what we heard from our CEO, that we have already plans bringing into the conventional technology down to let’s say 110 or 115 and then I think that’s the good news for BMW, we have the i3 in the market and the lot is depending on how electro mobility is now developing over time.
I mean, in markets where it is supported, because the regulatory framework is positive or there is support given in a certain way it takes off and then it helps a lot, because it's zero emission and it calculates zero in a fleet average and that’s the reason despite all the criticism around and jealousy around that we are pushing for i3.
And we think it’s exactly the right strategy and the car is successful so far and we may make it successful going forward, because it has the potential to give us a certain relief when it comes down to the cost and sustainability we have it. It’s done, we have invested for it and we are now able to sell it in bigger volumes, I think we are there.
So that’s how we look at it and our fears are that was expressed Dr. Reithofer, is that the politicians are really overdoing that. When you have to see and you mentioned it, we have to fight so hard to get to 2020. And then something in five years later we can take another 30% step down, bring the CO2 down.
I mean, physically that’s hard to understand how this should work out. But it demonstrates the thinking in that corner and the balance between what is reasonable – can be reasonably achieved on the CO2 front and what some politicians at least are asking for is not in place anymore.
That’s the problem and it’s one of the biggest risk in Europe. In Europe and not in other markets, because if you look at the U.S. or looking at China, so they are treating that issue much more carefully. That’s the second message we want to bring over. So our home market is the toughest when it comes down to this. So that’s what I wanted to add to your question.
Now, how should we think going forward? Where should the growth and the profitability come from? I think that the growing market will contribute a lot. I mean, overall the common industry is in a segment that is growing.
Why? Because the world population is growing. Why? Because in China we have so big cities without an infrastructure and they will come and maybe there will be a point in time or even in India will turn around its head and build some roads where cars could drive.
So that could come as well. So, in the long term, I think as long as world population is growing, right and people are looking for wealth and they are developing the countries, the car industry has good future. It might be – and as long as and it’s not a breakthrough innovation is coming with these the costs can fly or whatever, then this should be the position we are in.
And that's good news, because we have other industries that don’t have that perspective. So that’s what we have and the rest is now up to us. We have to find the right market, the right product, the right answer and BMW in the past did quite well on this. That’s what I want to say.
Thank you very much. I think it was a real perfect answer from our strategic CFO. Last question, Jose Asumendi.
Jose Asumendi – JPMorgan
Thank you, Jose, JPMorgan. Just going back to pricing when I look at your Seven Series discounts that you are giving currently in China, you’ve gone back to all-time high levels. Are you seeing this in the market? Do you expect that similar reaction on the three where with 100 basis points of pricing improvement for the year?
The second element of the launch cost, so if you could give some guidance for launch costs, so many vehicles there must be some launch cost this year. And finally on front wheel drive platform for Mr. Reithofer. From an engineering perspective, how does this work in terms of big components you are standardizing in terms of engine, transmissions, axles? And could you quantify the economies of scale in terms of units? Thank you.
Gentlemen, who wants to do that? Norbert, okay, the Chairman, yes.
I mean, you mentioned the new architecture, I mean, let me start BMW five years ago, from a economies of scale coming from a economies of scale point of view, we were not very competitive. And in principle we had no other choice than to ask ourselves, how can we change our architecture, our car architecture to be more profitable, to generate more economies of scale and we said, we can only do so if we reduce all our cars to two basic architectures.
And that is exactly what we have done that means, 3 Series, 5 Series X5, X3, 6 Series, all on one modular system. So – and on the other hand, BMW 2 Series Active Tourer, MINI Clubman, MINI Countryman, X1, all on one architecture.
So – and in between two architectures, a modular system for all our engines, three cylinder, four cylinder, six cylinder, diesel engine, petrol engine coming from one modular system, then electrification, the same one modular system for both basic architectures.
So, that means, better economies of scale than let me say five years ago because of more volume on one modular system. And it gives us the opportunity as well and it’s a real advantage to launch additional derivatives much faster than in the past. So, if the customers of BMW, they would like to see, let me say different cars in a much shorter period of time, you have to be able to deliver.
With our two basic architectures and with our additional modular systems, we will never be able to deliver in a much shorter period of time new derivatives. So that means, we changed the BMW Group towards to be much more flexible than in the past.
So, in my opinion, it’s a very important step and if you see the year 2014 with 15, 16 new products or model updates, so you will only be able as a car company to launch 15, 16 new products if you are able to have only two basic architectures. So – I thought that that was a very important step for us.
Yes, talking about some issues in China, well, you are absolutely right. We don’t like the discounting of Seven Series in China and now we have to discuss who started the battle first. But I don’t want to discuss it now. We all know we have to find a way out.
Fortunately, it was the only Seven Series issue so far and it was kicked off in 2012. This year as new products will be launched in that segment, we see a big chance to get a bit out of the battle and fortunately for other derivatives like the Three Series or the Five Series, we don’t see the same picture there.
We are quite satisfied with our pricing for those volume products. Overall, when it comes down to pricing, in essence, if you forget about the Seven Series it’s an European issue. We don’t have the problem in the U.S. We don’t have in other parts of the world. It’s an European issue. It has to do with the crisis in Europe in the car market and we are still at a very low level.
That’s why we think if Europe is in a position to recover with this year, and we see first signs in a first couple of months now, and then it must be possible with a very young product portfolio in the BMW Group to gain some pricing efficiency back and that’s the background of our guidance when I told you that we are looking for up to 100 basis points in that area.
Launch cost, yes, of course, we have launch costs because we are launching many new models. They are factored into the extra burden and factored into our guidance. So far we never disclosed launch costs and please accept that they don’t want to change that today and – what was the last question? What was it?
Jose Asumendi – JPMorgan
So ladies and gentlemen, thank you very much. We have lunch together and both Mr. Eichiner and Mr. Reithofer are with us and present for lunch. After lunch, you are going to visit our plant in Dingolfing. The bus which will bring you there waits at the entrance right next to the lobby. If you are going to the airport or to the train station, a shuttle is always available for you. Departure is at 1 o'clock. Thank you very much and now we will see us for lunch.
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